Investors learninghowto invest in the stock market might askwhento invest. Knowing when to invest, however, isn’t as important as how long you stay invested.
Trying to navigate the peaks and valleys of market returns, investors seem to naturally want to jump in at the lows and cash out at the highs. But no one can predict when those will occur. Of course we’d all like to avoid declines. The anxiety that keeps investors on the sidelines may save them that pain, but it may ensure they’ll miss the gain. Historically, each downturn has been followed by an eventual upswing, although there is no guarantee that will always happen.
The chart below shows two hypothetical investments in the S&P 500 over the 20-year period ending December 31, 2022. Each investor contributed $10,000 every year. One investor somehow managed to pick the very best day (the market low) of each year to invest. The average annual return on that investment would have been 11.43%. The other investor was not so lucky and actually picked the worst day (market high) each year. Even with the worst investment timing, the average annual return would have been 9.48%. At the end of 20 years, the cumulative investment of $200,000 had a value of $549,645.
So even selecting the worst day each year to invest, someone who continued investing in the market over the past 20 years would have come out ahead. It’s important to note that regular investing neither ensures a profit or protects against a loss. However, the tables below illustrate how regular investing can be beneficial.
Timing isn’t critical to long-term success
Note that the hypothetical investors above didn’t pull out of the market but stayed the course for 20 years. That perseverance helped improve the chances that they would come out ahead. In fact, history has shown that positive outcomes occur much more often over longer periods than shorter ones.
Over the past 94 years, the S&P 500has gone up and down each year. In fact 27% of those years had negative results. As you can see in the chart below, one-year investments produced negative results more often than investments held for longer periods. If those short-term one-year investors had held on for just two more years, they would have experienced nearly half as many negative periods.
And the longer the time frame — through highs and lows — the greater the chances of a positive outcome. Indeed, over the past 94 years, through December 31, 2022, 94% of 10-year periods have been positive ones. Investors who have stayed in the market through occasional (and inevitable) periods of declining stock prices historically have been rewarded for their long-term outlook.
Rather than trying to predict highs and lows, it’s important to stay invested through a full market cycle. Focus on the time you stay invested, not the timing of your investments.
FAQs
Does Time In the Market Beat Market Timing ? Nobody can exactly predict a stock's future price, but that doesn't stop many from trying to do so. Study after study over the years has shown that “market timing” does not work and that “time in the market” is the way to go. That said, academia can be redundant.
Who said it's not about timing the market but about time in the market? ›
In the words of Kenneth Fisher, “Time in the market beats timing the market.”
Is time in market more important than timing the market? ›
The old adage, “it's not about timing the market, but about time in the market,” has been proven true over the years. Research shows that those who stay invested over the long run in a well-diversified portfolio will generally do better than those who try to profit from turning points in the market.
Why is timing the market bad? ›
There is much potential to lose money when market timing. You would obviously lose money if you have to sell stocks or other securities at a loss because the price fails to increase. But even buy-and-hold investors can lose money trying to time the market.
What does Warren Buffett say about timing the market? ›
Timing the market and making investment decisions purely based on market forecasts is not a good strategy. Instead of trying to predict the market, Buffett prefers to focus on identifying companies with good fundamentals that the market is undervaluing.
Has anyone consistently beat the market? ›
The phrase "beating the market" means earning an investment return that exceeds the performance of the Standard & Poor's 500 index. Commonly called the S&P 500, it's one of the most popular benchmarks of the overall U.S. stock market performance. Everybody tries to beat it, but few succeed.
What is the famous quote of Warren Buffett? ›
"Price is what you pay. Value is what you get."
What is the market timing scandal? ›
On Sept. 3, 2003, then-New York Attorney General Eliot Spitzer announced he was investigating mutual fund companies for practices hurting small investors. The companies were allowing special clients to make rapid mutual fund trades, in violation of their prospectuses and at the expense of fund investors.
What is the market timing theory? ›
The market timing theory implies that companies issue equity when it is overvalued and. repurchase equity when they are undervalued.
How successful is market timing? ›
The study shows that if you have perfect timing you will come out ahead, but not by much. Numbers two and three were both within 11% of the perfect market timer. Even the one with bad timing came out with three times the amount after 20 years when compared to number five, who held their money in cash.
Market timing is not impossible to do. Short-term trading strategies have been successful for professional day traders, portfolio managers, and full-time investors who use chart analysis, economic forecasts, and even gut feelings to decide the optimal times to buy and sell securities.
What time does the market move the most? ›
Market volume and prices can and do go wild first thing in the morning, precisely the first 15 minutes. People are making trades based on the news. Power hour between 3:00 pm and 4:00 pm is also a very popular time. The best time to buy stocks is 9:30 am to 11:00 am EST because the market is most liquid.
What is the best time of the day to buy stocks? ›
The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.
Which is the most conservative asset class? ›
Cash and cash-like assets.
These highly liquid assets offer the lowest rate of return of all asset classes, but they also offer very low risk, making them the most conservative (and stable) investment asset. You can buy individual stocks or bonds to get your desired asset allocation.
How can we stop timing the market? ›
Invest on a set schedule
One way to prevent yourself from trying to time the market is to invest a set amount of money on a regular schedule, a strategy known as dollar-cost averaging. For example, you might invest $1,000 once every quarter.
What is the perfect market timing strategy? ›
A perfect market timing strategy needs to know, with certainty, the future returns of the assets that are eligible for investment. Armed with this information, the perfect market timing strategy always chooses the highest returning asset to invest in.
Is it tough to consistently beat the market? ›
It is relatively common to beat the market for 1–3 years at a time. That can largely be explained by luck. But the data clearly shows that even professional fund managers are unable to beat the market consistently over a longer period of time, like 10–15 years.
